Fundamentals of Taxation

Definition of Tax and Taxation

Tax is an enforced proportional contribution
from persons and property levied by the lawmaking body of the state having jurisdiction
over the subject of the burden for the support
of the government and all public needs. (De
Leon, 2012) Taxation on the other hand is
the act of laying a tax. It is the process by
which the sovereign, through its law-making
body raises income to defray the necessary
expenses of the government. It is merely a
way of apportioning the cost of government
among those who in some measure are
privileged to enjoy its benefits and, therefore,
must bear its burdens. (see 71 Am. Jur.2d 342;
Cooley 72-73)

Importance of Taxation
The power of taxation proceeds upon the
theory that the existence of government is a

necessity. Without money the government

will cease to exist. Taxes are the lifeblood of
the government. It cannot continue without
means to pay its expenses.
To perform its
functions effectively, it has to compel all its
citizens and property within its limits to pay
taxes.
Essential Characteristics of Tax
1. Tax is an enforced contribution.
It is a forced burden, charge, exaction,
imposition or contribution assessed in
accordance with some reasonable rule of
apportionment by authority of a sovereign
state upon the persons or property within its
jurisdiction, to provide public revenues for the
support of the government, the administration
of law, or the payment of public expense. (51
AM. Jur. 35-38)
2. Tax is generally paid in money.
The term tax is usually understood to be an
exaction - discharged only in the form of
money.

3. Tax is proportionate in character.

Tax is based on the ability to pay principle.
There are individuals who pay very high taxes
while others very small amount or none at all.
However, the income of minimum wage
earners in the Philippines are exempted from
taxation.(R.A. 9504)
4. Tax is levied on persons or properties,
rights and obligations.
A tax may be imposed on the right to earn an
income but it is the person who pays the tax.
On the other hand, the amount of real
property tax is usually the basis in order to
determine the amount of tax to be paid.
5. Tax is legislative in nature.
Tax is levied by the law-making body of the
state. In the Philippines, only the members of
Congress have the power to enact tax laws.
6. Tax is territorial.

The power to impose tax is territorial.

Income earned abroad is not taxable in the
Philippines.
7. Tax is for public purpose.
Tax is collected by the government for public
purpose. For this reason, the revenue derived
from taxes may not be used for the exclusive
benefit of private persons.
8.
Tax is imposed to raise government
revenues.
Tax is used to finance the expenditures of
government. Without money the government
will cease to exist.
9.Tax is paid in regular intervals.
The amount of tax due is to be paid at
regular intervals.
Nature of the Power of Taxation
1. Inherent in sovereignty.
This power exists as an incident or attribute of
sovereignty, as it is essential to the existence

of every government.
The power can
therefore be exercised even without the
Constitution or any law expressly conferring
such power.
2.Legislative power
The power of taxation can only be exercised
by the lawmaking body (Congress), not by the
executive or the judicial branch of the
government, except when delegated by the
national legislative body, or to the executive
branch, subject to limitations as may be
provided by law.
3. Inherent and constitutional limitations
Taxation has inherent limitations, such as the
following:
1. Taxes must be levied for public purposes
and no amount shall be used for religious
purposes;
2. The power of taxation cannot be delegated;
3. Only one tax can be imposed on the same
income (rule against double taxation);

4. Government instrumentalities and agencies

through which the government exercises
sovereign powers are exempt from tax, in the
absence of a contrary intent in the law;
5. The power of taxation is limited to the
territorial jurisdiction of the taxing state;
6. The laws cannot apply to properties of
foreign governments (international comity);
and
7. The Supreme Court has jurisdiction on tax
laws.

Taxation has constitutional limitations, such

as:
1. Taxation is subject to the due process of
law.
No person shall be deprived of life,
liberty or property without due process of
law (1987 Philippine Constitution, Art. III.
Sec. 1)

The 1987 Constitution states that life,

liberty, or property cannot be taken unless the
established procedures prescribed by law
have been followed. The ultimate objective of
the due process clause is to protect
individuals from abuses in the exercise of
government powers.
Deprivation of life, liberty or property,
therefore, is not allowed unless:
a. There is a law not contrary to the
Constitution authorizing such deprivation; and
b.
The prescribed procedures in
deprivation must have been followed.

the

2. No law impairing the obligations of contract

shall be passed.
The obligation of a contract is impaired
when its terms and conditions are changed by
law or by a party without the consent of the
other, thereby weakening the position or the
rights of the latter. If a tax exemption granted
by law and of the nature of a contract
between the taxpayer and the government is

revoked by a later taxing statute, the said law

shall not be valid, because it will impair the
obligation of contract.(Casanovas vs. Hord, 8
Phil. 125)
3. No person shall be imprisoned for debt or
non-payment of a poll tax.
Poll tax is a kind of tax imposed upon certain
class of persons residing within a territorial
jurisdiction, regardless of property, profession
or occupation. An example is the community
tax.
No person shall be imprisoned for debt or
non-payment of poll tax. (1987 Philippine
Constitution, Art. III, Sec. 20)
The constitutional provision specifically
states that non-payment of poll tax is not
subject to imprisonment . Non-payment, of
other types of taxes, therefore, is subject to
imprisonment.
Also the provisionof the law does not
expressly mention that non-payment of poll
tax is not subject to penalty. Delinquent

payment of poll tax, therefore, is punishable

through the imposition of the corresponding
surcharges.
4. The rule on taxation shall be uniform and
equitable.
The rule of taxation shall be uniform and
equitable.
Congress
shall
evolve
a
progressive system of taxation (1987
Philippine Constitution Art VI, Sec. 28 [1])
Uniformity simply means that all subjects of
taxation under the same class shall be treated
alike. Thus the same rate shall apply to the
subject belonging under the same class.
Equitable taxation means that the tax shall be
based on the ability of the individual to pay.
The more income an individual earns, the
more tax shall be collected from him/her.
Progressive system of taxation is a system
wherein direct taxes are given preference
over indirect taxes. It applies progressing tax
rates as the tax base increases.

5. Exemption from property taxation of

charitable institutions, churches, educational
entities, convents, non-profit cemeteries
Charitable institutions, churches,
parsonages, or convents appurtenant thereto,
mosques, and non-profit cemeteries, and all
kinds of lands, buildings and improvements,
actually, directly, or exclusively used for
religious, charitable purposes or educational
purposes, shall be exempt from taxation.
The constitutional provision is very specific
in relation to exemption. What is exempted is
property tax only on the properties of the
aforementioned entities.
Property tax refers to tax on taxpayers
real property located within a territorial
jurisdiction of the State. The amount of tax is
based on the fair market value of the
property.
Impliedly, the properties of religious,
educational or charitable institutions are
covered by other forms of tax, like capital

gains taxes, once the property is sold or

transferred.
Similarly, special assessments are not
covered by the provision of the Constitution,
since they are not taxes but charges on land
and its improvements.

Individual
Taxation,
Computations

Exemptions

and

An individual is an entity whose activity is

more dynamic than that of a corporation. As
such, employees suffer from greater abuse
than corporations and persons engaged in
business in terms of taxation. Tax on an
individual occupies the larger space in the Tax
Code, occurring in many different kinds and
treated as a greater obligation than even debt
or contract. Imposing many different kinds of
tax on the individual taxpayer is based on the
premise that every person has an unlimited
capacity to earn. The individual taxpayer,
however, is granted several non-monetary

benefits by the government to help lessen the

difficulty of paying taxes.
Meaning of Income
Income refers to the amount of money or its
equivalent, representing gains or profit that
flows into the taxpayer from whatever sources
other than those representing return of
capital.

Meaning of Income Tax

Income tax is a tax on the net income or the
entire income received or realized in one
taxable year. It is levied upon corporate and
individual incomes in excess of specified
amounts, less certain deductions and
or/specified exemptions in cases permitted by
law.
Gross Income
Gross income means all income derived from
whatever source, including the following:

1. Compensation for service in whatever form

paid, including fees, salaries, wages, and
commissions;
2. Income derived from the conduct of trade
or business or the exercise of profession;
3. Gains derived from dealings in property;
4. Interest;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9.Prizes and winnings;
10. Pensions; and
11. Partners distributive share from the net
income
of
the
general
professional
partnership
Simply stated, income refers to the amount of
money or its equivalent, representing gains or
profit that flows into the taxpayer from

whatever
sources
other
representing return of capital.

than

those

Meaning of Compensation income

Compensation income refers to the
remuneration received by workers in the
manufacturing, trading and service industries.
These employees include factory workers,
maintenance personnel, electricians, janitors
and other sub-contractual workers like
cashiers, sales clerks and security guards.
Public and private school teachers also earn
income from an employer and employee
relationship as do government employees,
including officers and top management
people. To determine whether an employeremployee relationship exists, an employee
must work in the company and must be under
the control of the employer.
Such persons
earning income or salary from employment
are called persons earning compensation
income.
Under the new law (R.A. 9504)
minimum wage earners shall be exempt from
the payment of income tax. Holiday pay,

overtime pay, night differential pay, and other

hazard pay received by such minimum wage
earner shall likewise be exempt from income
tax.
Taxable Income
Taxable income refers to the earnings of a
taxpayer subject to the basic or normal tax,
with rates ranging from 5% to 32%, or to final
tax.
Personal Exemption
Personal exemption is an amount granted by
law to the individual taxpayer only.
The
amount of personal exemption is the
allowable deduction from gross income.
Basically, this represents an arbitrary amount
intended to cover the taxpayers personal,
family, and living expenses or a minimum
subsistence for himself/herself/and his/her
dependents.
Personal exemption has no direct or
indirect relation with the income level of the
taxpayer.

The two types of personal exemptions

allowed to an individual taxpayer are:
1. Basic personal exemption an arbitrary
amount based on the civil or filing status of
the taxpayers; and
2. Additional Personal Exemption an
amount allowed based on the number of
qualified dependent children of a taxpayer.
The additional personal exemption is
allowed only for a qualified dependent child.
The following table presents the basic
personal and additional exemption allowed by
laws.
Table 1.0
Exemption

Basic

Classification of
Taxpayers
according to
filing status
Basic
Single
Head of the

Personal

and

Additional

R.A. 8424
(Jan. 1, 1998July 5, 2008)

R.A. 9504
(July 6, 2008thereafter)

P 20,000
25,000

P 50,000
50,000

Family
Married
Additional
For
each
qualified
dependent
child
not
to
exceed four

30,000

8,000

50,000

25,000

Basic Principles of a Sound Tax System:

1. Fiscal adequacy. The sources of revenue
should be sufficient to meet the demands of
public expenditure;
2. Equality or theoretical justice. The tax
burden should be in proportion to the
taxpayers ability to pay; and
3. Administrative feasibility.
Tax laws
must be capable of convenient, just, and
effective administration on the part of both
the government and the taxpayer.
4. The tax system should be consistent or
compatible with economic goals.

Income Tax on Individuals

Basic income tax is collected from individual
taxpayers, except for non-resident aliens not
engaged in business in the Philippines.
Resident citizens and aliens in general
shall be taxed a 5% to 32% tax table known
as graduated basic income tax. Their net
taxable income consists of all sources within
and outside the Philippines. These individuals
are required to file the corresponding income
tax returns.

Computation of Individual Income Tax

Table 1.1 Graduated Basic Income Tax Rate (532% tax table)

A simple illustration of computing total

income tax payable is shown below:

Gross Compensation Income

Less: Business Expense (if applicable)
Less: Personal & Additional Exemptions
Equals: Net Taxable Income
Multiply by Tax Rate (5 to 32%)
Equals: Income Tax Due
Less: Tax credits & payments
Equals: Income tax payable
Add: Penalties (Surcharge, interests &

compromise)
Equals: Total amount payable
The following examples show how the income tax due is
computed:

Illustration:

Mr. Edmon de la Cruz, a resident citizen had the following data

for taxable year 2014. He receives a gross compensation income
of P700,000 as an electronics and communications engineer in an
IT Company in the Philippines. He is married with four (4)
qualified dependent children. What is his income tax due?

Solutions:

Gross compensation income------------------------P700,000

Less: Allowed Deductions:
Personal exemption (married) -P50,000
Additional personal exemption--100,000 150.000

Net Taxable Income-----------------------------------P550,000

Income tax due first P500,000---------------------P 50,000
In excess of P500,000: 50,000 x 30%--------16,000
Add:
125,000 & 16,000
Income tax due----------------------------------------141,000

Illustration:
Mr. Christian Gonzalez, a resident citizen who is married and has
five children, works as a program development consultant for
Innovation Educational System. Despite his hectic schedule, with
the help of his wife, he can still manage a business here and
abroad. Shown in the table below are his incomes and expenses.
Gross Income
Compensation
Income
Gross Income from
Business
Business Expenses
Status: Married with
two children

Income derived from Income derived from

Phil.
Dubai
P490,000
350,000

P550,000

200,000
150,000

150,000

Solutions:

Compensation
------------------------P490,000

income

Gross income
350,000

from

business

(Phil.)--------

Gross income
550,000

from

business

(Dubai)------

Less: Business Expenses (Phil.) ------200,000

Business Expenses (Dubai)-----150,000
Net Income
040 000

------------------------------------------1

Less:
Personal
------------------------100,000
Net
Taxable
--------------------------------940,000
First 500,000
440,000

Exemption
Income

-----------------------------------------

In excess of 500,000,
which is 440,000 x .32 ----------------- 140,800

Add: 125,000 & 140,800 ---------------------------265,800

Income Tax
P265,800

Due--------------------------------------

Payment of Tax and Filing of Returns

Procedures for paying and filing
1. Fill-up BIR Form 1701 in triplicate copies;
2. If there is payment:
a. Proceed to the nearest Authorized Agent
Bank (AAB) of the Revenue District Office
where you are registered and present the duly
accomplished BIR Form 1701, together with
the required attachments and your payment;
b. In places where there are no AABs, proceed
to the Revenue Collection Officer or duly
Authorized City or Municipal Treasurer located
within the Revenue District Office where you
are registered and present the duly
accomplished BIR Form 1701, together with
the required attachments and your payment;
and
c. Receive your copy of the duly stamped and
validated form from the teller of the

AABs/Revenue
Collection
Officer/duly
Authorized City or Municipal Treasurer

3. For No Payment including refundable/

creditable returns, returns with excess tax
credit carry over, and returns qualified for
second installment:
a. Proceed to the Revenue District Office
where you are registered or to any
established Tax Filing Centers established by
the BIR and present the duly accomplished
BIR Form 1701, together with the required
attachments; and
b. Receive your copy of the duly stamped and
validated form from the RDO/Tax Filing Center
representative.

Deadline
Final Adjustment Return or Annual Income Tax
Return - On or before the 15th day of
April of each yearcovering income for the
preceding year.

Individuals engaged in business or in the

practice of profession should file and pay
quarterly income tax returns on the following
dates:
First quarter income tax on or before April
15 of the current year
Second quarter income tax return on or
before August 15 of the current year
Third quarter income tax return on or before
November 15 of the current year
Fourth quarter on or before April 15 of the
following year
Quarterly income tax system is the only way
for persons engaged in business or practice of
a profession to pay their income tax, while on
the
other
hand,
persons
earning
compensation income pay income tax on a
monthly withholding tax system through a
withholding agent, the employer.

Exercises and Problems

Part I
1. Determine the net taxable income and income tax due of each
individual taxpayer whose gross income is shown on the table.
No.

1
2
3
4
5
6
7
8
9
10-

Gross
Compensati
on Income
P 100,000
165,500
275,200
135,400
675,200
815,800
2,150,500
2,515,600
2,750,550
3, 500,700

Allowed
Deductions

Net Taxable
Income

50,000
75,000
75,000
75,000
100,000
150,000
150,000
100,000
100,000
125,000

50k

Income Tax
Due

2. What is the income tax due on each of the following net

taxable income?
No.
1
2
3
4
5
6
7
8
9
10

Net taxable income

P150,700
200,500
325,500
550,000
750,500
855,500
1,000,500
2, 250,600
3, 550,250
85,300

Part II: Exercises

Income tax due

1. Mr. Jaime Macaspac, married and a resident citizen, was

separated from his wife after Philippines was hit by typhoon
Yolanda in 2013. He resides in the Philippines with his son as a
qualified dependent and works as a part-time call center AGENT
in Pasig with an annual salary of P799,500. Compute for his tax
due.
2. Mrs. Maria Lim, married supports her mother who is 65 years
old, her nephew aged 12 years old and her grandmother. She
works as a bank teller and earns P40,000 per month. What is her
income tax due?
3. Mr. Raphael Miguel, married, has been staying in the Philippines
for 4 years now with his food cart business in Masinag, Antipolo
City. His uncle supports him in maintaining the business. The
gross income from business is P950,500 and the related business
expenses amounted to P150,000. Determine the taxable income
and the income tax due.
4. Engr Gilbert Gonzales, single in status, earns a monthly
income of Php 80,000 as a professor of MIT. His monthly
payments include SSS Php 1800, Philhealth Php 1200 &
Pag-ibig Php 1000. What is his income tax due?
5. Nestor, a Muslim with two wives with 5 children each - all
below 18 years of age, earns a monthly income of Php 60,000
for his professional services at Company X. However, due to a
severe political conflict in Mindanao, he filed a leave of
absence for the last two months of year 2014. How much did
he pay at BIR for his tax due for 2014?
6. Prof. Bartolome, married without any child, earns Php 60,000
per pay day at Mapua Institute of Technology. His withholding
tax per month is Php 6500. He also earns Php Php 6000 per
month as the extension coordinator the School of Languages,
Humanities and Social Sciences (SLHS), and Php 10,000 per
month for his consultancy services at the UST-Center of

Innovation and International Development (UST-CIID). What

is his tax due, and net tax due, if any?
7. Ms. Michelle Perez, legally separated with one legally adopted
child whose age is 15, has a monthly income of Php 50,000.
Other than her regular compensation, she receives a 13 th
month pay of Php 85,000 and a summer bonus of 50,000.
Compute for the tax due.
8. Mrs. Ramos earns Php 30,000 per month as a public
elementary school teacher. Her husband works in Dubai as a
mechanical engineer sending a regular monthly remittance of
PHp 30,000. She has a child with exceptionality whose age is
already 25 years old, and three (3) other children as qualified
dependents. What is her gross compensation income? What
about her total exemptions? What is her tax due?

References

Aduana, Nick L.,Simplified and Procedural

Handbook on Income Taxation, 2nd edition,
C&E Publishing Incorporated, 2012
Arandia-Villanueva, Angelina,
Filipinos, C&E Publishing 2006

Taxation

for

Urbano, Bartolome R.,Income Taxation Made

Available,
C&E Publishing Incorporated,
2009
Republic Act 8424 Tax Reform Act of 1997
Republic Act 9504 An Act Amending Sections
22, 24, 34, 35, 51, and 79 of Republic Act No.
8424, as Amended, Otherwise known as the
National Internal Revenue Code of 1997
1987 Philippine Constitution of the Philippines.
http:/www.chanrobles.com/philsupremelaw1.h
tm